British Virgin Islands-Overseas Territory of the United Kingdom
Assessment of the Supervision and Regulation of the Financial Sector Volume II-Detailed Assessment of Observance of Standards and Codes

This report provides an assessment of the British Virgin Islands’s (BVI) compliance with the Basel Core Principle for effective banking supervision. The BVI has the preconditions for effective banking supervision. It has specific legislation governing international cooperation and mutual legal assistance. The BVI has designed its antimoney laundering (AML)/combating the financing of terrorism supervisory legislation to apply broadly to banks and trust companies, insurance business, and parallel areas. The financial services commission is responsible for both prudential supervision and ensuring compliance with AML measures.

Abstract

This report provides an assessment of the British Virgin Islands’s (BVI) compliance with the Basel Core Principle for effective banking supervision. The BVI has the preconditions for effective banking supervision. It has specific legislation governing international cooperation and mutual legal assistance. The BVI has designed its antimoney laundering (AML)/combating the financing of terrorism supervisory legislation to apply broadly to banks and trust companies, insurance business, and parallel areas. The financial services commission is responsible for both prudential supervision and ensuring compliance with AML measures.

I. Basel Core Principles for Effective Banking Supervision

A. General

1. This report provides an assessment of the British Virgin Islands’ (BVI) compliance with the BCPs. The assessment was undertaken as part of the IMF Module 2 for Offshore Financial Centers. The conclusions of this report are based on an initial self-assessment of the authorities, supplemented by additional discussions between the team and the authorities. This assessment was prepared by Mr. Joseph O’Neill.

Information and methodology used for assessment

2. The assessment of fulfillment of the core principles is not, and is not intended to be, an exact science. Banking systems differ from one country to the next, as do their domestic circumstances. Furthermore, banking activities are changing rapidly around the world and theories, policies, and best practices of supervision are evolving swiftly. Nevertheless, it is acknowledged internationally that the core principles are seen as minimum standards.

3. The assessment of compliance with each principle has been made on a qualitative basis. A five-part assessment system is used: compliant; largely compliant; materially noncompliant; noncompliant; and not applicable. To achieve a “compliant” assessment with a principle, all essential criteria generally must be met without any significant deficiencies. There may be instances where a country can demonstrate that the principle has been achieved through different means. Conversely, due to specific conditions in individual countries, the essential criteria may not always be sufficient to achieve the objective of the principle and, therefore, one or more additional criteria and/or other measures may also be deemed necessary by the assessor to judge that compliance is achieved. A “largely compliant” assessment is given if only minor shortcomings are observed and these are not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of that principle. A “materially noncompliant assessment” is given when the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress had been made. A “noncompliant” assessment is given when no substantive progress toward compliance has been achieved or when insufficient information was available to conclude that substantive progress had been made toward compliance. An assessment of “not applicable” is rendered for a principle deemed by the assessors not to have relevance.”1

4. The assessment has been carried out on the basis of the BTCA of 1990. The assessors had working sessions with representatives from the Financial Services Commission (FSC), various other governmental authorities, the bankers association, and commercial banks.

Market structure

5. The BVI banking system is composed of 11 banks with total assets amounting to approximately US$2.76 billion. All banks, except for the Development Bank of the Virgin Islands (DBVI), operate under the Bank and Trust Company Act (BTCA) and are subject to the supervision of the Financial Services FSC (FSC). Under the BTCA, entities that engage in the business of banking in the BVI must have a general banking license. The BTCA provides a restricted Class I Banking License, which limits deposit taking to persons outside the BVI and prohibits investing in assets that represent a claim on any BVI resident, with certain exceptions (Table 1).

Table 1.

Banking System As of June 30, 2002

(In millions of U.S. Dollars)

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Source: FSC.

Excludes Disa Bank (BVI) Limited (a subsidiary of a Panamanian bank), which has been in receivership since 2001.

This corporation is engaged solely in intercompany treasury operations.

6. General license banks are primarily subsidiaries or branches of highly reputable regional and international institutions, which are subject to strong prudential regulation and effective consolidated supervision from their country of origin. These include Banco Popular de Puerto Rico, Barclays (which is being restructured into a new regional banking group called First Caribbean International Bank), HSBC, and Scotia Bank.

7. The general license banks are locally engaged primarily in traditional deposit taking and lending activities (residential mortgage, personal, small business and local government). Close to 50 percent of the deposits in the general license banks are from foreign individuals and corporations. Foreign funding received by general license banks relates primarily to taxation strategies of individuals, and functions as a complement to international business companies, trust companies, and mutual funds licensed in the BVI.

8. Total loans outstanding in the general license banks as of June 30, 2002, amount to approximately US$500 million, or approximately 30 percent of their total assets. The portfolio consists mostly of residential, personal, small business, and government loans, and the vast majority of these are to BVI persons. Approximately, 60 percent of total assets (or US$1 billion) is placed in deposits and short-term instruments with other banks, the home office, parent bank or affiliates, which represents an unusually high level of liquidity and, in various cases, a significant credit concentration risk.

9. Total capital for general license banks amounts to US$123 million, which is deemed adequate.

10. The restricted bank activity is concentrated in the Bank of East Asia (BVI) Limited with total assets amounting to US$977 million. This bank engages in deposit taking from customers of its affiliates and redeposits all its funds with its parent bank.

11. The DBVI operates pursuant to the Development Bank of the Virgin Islands Ordinance of July 1974 (DBVI Ordinance), and is engaged in traditional retail and commercial banking activities, including accepting deposits from the public. Even though the DBVI is currently exempt from the prudential oversight, it provides periodic regulatory information to the FSC on a voluntary basis. It is expected that the DBVI Ordinance will be amended to place the DBVI under the FSC’s regulatory jurisdiction.

General preconditions for effective banking supervision

12. In accordance with the core principle methodology, the preconditions for effective banking supervision include: (i) sound and sustainable macroeconomic policies; (ii) a well-developed public infrastructure; (iii) effective market discipline; (iv) procedures for efficient resolution of problems in banks; and (v) mechanisms for providing an appropriate level of systemic protection.

13. Generally, the BVI has in place the preconditions for effective banking supervision. Although the BVI lacks mechanisms for systemic protection, the composition of the onshore banking system (branches or subsidiaries of strong regional and international banks, which operate under systemic safeguards themselves) mitigate this shortcoming adequately. In addition, as discussed further in the following section, transparency in the system may be improved substantially. However, this deficiency is deemed not to have a significant adverse effect on the operations of the banking system, as the parent banking organizations are mostly publicly traded companies subject to strong transparency standards.

14. Accordingly, it is expected that international standards and best practices are applied by all participants in the BVI.

B. Detailed Assessment

Table 2.

Detailed Assessment of Compliance of the Basel Core Principles

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Table 3.

Summary Compliance of the Basel Core Principles

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C: Compliant.

LC: Largely compliant.

MNC: Materially noncompliant.

NC: Noncompliant.

NA: Not applicable.

Recommended action plan and authorities’ response to the assessment

15. Four major issues that cut across several core principles should be addressed promptly:

  • Priority should be given to recruiting additional qualified staff. Current staffing levels are inadequate to perform in-depth effective supervision of the BVI’s financial system. The FSC has adequate financial resources and has the flexibility adequately to compensate its personnel. The FSC may also consider utilizing consultants to perform various detailed testing procedures.
  • The FSC, with the assistance of KPMG, is in the process of creating on-site supervision modules for multiple regulated persons including banks, trust and insurance companies. The successful implementation of these on-site supervision modules coupled with solving the staffing shortcomings will significantly influence the future effectiveness of the FSC’s supervision.
  • The head of the FSC currently lacks legislative certainty. Full regulatory independence would be provided if the person with the ultimate supervisory and enforcement responsibilities had a fixed term appointment and if greater transparency were provided in the event of separation.
  • The jurisdiction generally lacks transparency as to financial information on the market participants. The FSC is encouraged to engage in a process to substantially increase the level of transparency.
Table 4.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

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Authorities’ response

16. The FSC has recently signed off on the Fiduciary/Company Management On-site Monitoring Program and the Banking On-site Monitoring Program is expected to be signed off on shortly. Although the FSC has not had a formal on-site inspection program, because of the size and nature of the banking business in the BVI, the Bank Prudential Visit Questionnaire has proven to be a good source of gaining adequate insights into the banks’ operations. A new Bank Prudential Visit Questionnaire will allow the FSC to assess banks assets quality amongst other things.

17. The FSC follows a risk based approach to supervision, which has led it to concentrate its supervisory work on, asset liability management, financial performance, capital adequacy requirements, and management of credit risk.

18. With regards to concentration and liquidity risks, draft guidelines developed along international standards are currently with the banking industry for consultation. The proposed standards for credit policies and large exposure were developed to be consistent with the BCP. Although no specific rules have been set for banks’ loan, investment policies and practices, since these are considered management responsibilities, the FSC expect banks to identify, monitor and control credit risk. Clear and precise rules with regards to large exposure have been developed. No specific loan classification or provisioning rules have been issued but the FSC expects banks to have internal policies that are consistent with international best practice.

19. Banks are required by the FSC to take reasonable care to establish and maintain systems and controls as appropriate to the nature and scale of their operations. BIS papers on Internal Controls and Operational Risks were issued to the banks as well as Interest Rate Risk. The nature of the banking systems in the BVI is such that there is an independent internal audit function conducted by either head office or parent bank. The quality of banks systems and controls and internal audits will be tested on an on-going basis when the FSC commences on-site inspections.

20. Country risk is not significant for BVI banks as most loans are to domestic companies or individuals. Where there are country risks exposures, the exposures are to OECD and G-10 countries. Connected lending is monitored from the prudential returns through the sections titles Related Party Deposits and Related Party Loans and Advances. All banks licenses have been approved and granted on the explicit understanding that the banks would be regulated according to the BIS standards.

21. The FSC now requires all branches to file audited financial statements commencing end of financial year 2003. A proposed amendment to the BTCA will require all banks to publish financial statements in the local press.

22. Prudential guidelines on the following are being drafted and are due to be implemented by end-2004: bank licensing; large exposures (completed); liquidity management (completed); credit concentration limits; risk weighted capital adequacy ratio; credit classification for provisioning purposes and income recognition; general principles for maintenance of accounting and other records and internal control systems; internet banking; corporate governance; related party transactions; relationship between financial institutions and external auditors; public disclosure of information; interest rate risk; country risk; market risk; code of practice for banks; and prudential returns (completed).

II. Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism

A. General

Information and methodology used for the assessment

23. An IMF-led Offshore Financial Sector (OFC) assessment of the British Virgin Islands (BVI) was conducted November 11–23, 2002. As part of the OFC, a detailed assessment of the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime was prepared using the Methodology for Assessing Compliance with Anti-Money Laundering and Combating the Financing of Terrorism Standards (AML/CFT Methodology). The AML/CFT Methodology was endorsed by the Financial Action Task Force (FATF) in October 2002 and the Fund and Bank Boards in November 2002.

24. The AML/CFT assessment was conducted by a team of assessors under the supervision of the Fund staff and an independent AML/CFT expert (IAE), who was not under the substantive supervision of Fund staff, and was selected from a roster of experts in the assessment of criminal law enforcement and non-prudentially regulated activities. IMF staff and experts reviewed the relevant AML/CFT laws and regulations, and supervisory and regulatory systems in place to deter money laundering (ML) and financing of terrorism (FT) among prudentially regulated financial institutions, including banking, insurance, and securities as well as measures relating to trust and company service providers (TCSPs), which are macro-relevant and vulnerable to money laundering. These aspects of the assessment were conducted by Ms. P. Moni SenGupta (LEG) and Ms. Marie-Christine Dupuis, a consultant from the United Nations Global Program Against Money Laundering.

25. Aspects of the capacity and implementation of the criminal law enforcement systems were assessed by Mr. Atle Roaldsøy, an IAE, from the Norwegian Ministry of Justice. Mr. Roaldsøy also completed the assessment of implementation of AML/CFT measures for money remitters, which are present in the BVI and vulnerable to ML but are not of macro-relevance to the financial sector. Aspects of the implementation and effectiveness of criminal justice measures are noted in italicized criteria in the assessment report. Aspects of implementation of preventive measures for money remitters are noted in specific line items in the discussion points for criteria 43 through 67, where necessary.

26. The assessment is based on a review of existing legislation, regulations, and supervisory guidelines and instructions that are currently in place. The authorities, in particular the FSC provided substantial supporting documentation, including responses to IMF questionnaires, independent research, and relevant aide-mémoires on AML/CFT progress that have been disseminated to the financial community and to other international bodies. The mission was advised of future and planned measures for changes in legislation and such measures are commented upon within the assessment report as a reflection of the response of authorities to self-identified needs and weakness, but do not constitute a basis of assessment ratings assigned.

27. The assessment is also based on meetings with various authorities, including the FSC, Attorney General’s Chambers (AGC), the Financial Investigations Unit of the Royal Virgin Islands Police (Police FINU),2 the Financial Secretary, Customs Office, and representatives of the private sector who are involved in implementation of AML/CFT measures. Authorities in the FSC and Police FINU also briefed the mission concerning upcoming proposals for which internal and confidential papers could not be disclosed. The mission found a generally satisfactory level of cooperation from authorities and the private sector and particularly appreciates the time committed and responsiveness of the FSC and Police FINU throughout the course of the mission.

General situation of money laundering and financing of terrorism

28. The BVI’s vulnerabilities to ML and FT arise primarily in two areas. First, as noted in the Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda prepared by KPMG (the KPMG Report) and the CFATF’s first round assessment of the BVI, BVI is located in an increasingly important transshipment corridor for the trafficking of cocaine from producer countries to the south and consumer countries to the north. In 1998, the CFATF found that the major problem being addressed by the police was drug trafficking. Second, the BVI is a major offshore financial center, with a dominant share of the global market for international business corporations (IBCs) that the CFATF concluded “given the robust financial activity in the country it is possible that incidences of money laundering do occur in the British Virgin Islands, particularly at the layering and integration stages.” As with many offshore financial centers, the BVI has been under scrutiny because the proliferation of IBCs, which are susceptible for use in money-laundering schemes because they can provide a nearly “impenetrable layer of protection around the ownership of assets.”3 The IBCs, while serving many legitimate business purposes have come under criticism, primarily because the activities of the IBCs and the identities of those controlling them are frequently separated by location. The criticism stems from not infrequent instances where IBCs “are formed without commercial or financial justifications, except to conceal the origin and destination of goods in international commerce, to circumvent arms control laws and to evade taxes by moving profits and assets out of the reach of the tax collector.”4

Overview of measures to prevent money laundering and terrorism financing

29. The primary legislative and supervisory regulations and guidelines for AML/CFT are the Proceeds of Criminal Conduct Act, 1997, (the PCCA), the Anti-Money Laundering Code of Practice, 1999, as amended in 2000 and 2001(the AMLCP), the Reporting Authority (Constitution and Procedure) Order, 1998, and the Anti-Money Laundering Guidance Notes for the BVI Financial Services Sector (Guidance Notes), which have been published since 1999 and are based on those of the United Kingdom. In contrast to the treatment of the Guidance Notes in the U.K. and other Crown and Overseas Territories, the AMLCP specifically incorporates the Guidance Notes into its requirements and renders the Guidance Notes subject to sanction for noncompliance, although the Guidance Notes themselves state these are not mandatory but represent best practices. Money laundering related to drug trafficking is captured by the Drug Trafficking Offenses Act 1992, as amended in 2000, and the Drug Trafficking Offenses (Designated Countries and Territories) Order, 1996.

30. In addition to these primary pieces of legislation directly focusing on ML, other legislation that establishes the framework for supervision also contribute to the supervisory measures for AML/CFT, which include the Banks and Trust Companies Act 1990, as amended, (BTCA), the Financial Services Commission Act (FSCA), the Company Management Act, 1990, as amended (CMA), the Mutual Funds Act 1996, as amended (MFA), and the Insurance Act, 1994 (IA). Regulations governing these sectors are also relevant for AML.

31. The BVI has specific legislation governing international cooperation and mutual legal assistance that are used regularly for the effective and efficient delivery of mutual legal assistance and providing assistance for international supervisors. The BVI focuses on providing assistance to other jurisdictions in money laundering investigations because, as a general matter, larger and more complex investigations are often already underway in other jurisdictions and the nexus of the activities is frequently stronger abroad. On balance, the BVI does not make as many mutual legal assistance requests as it receives from abroad, although the Attorney General’s Chamber advises that recent developments in the territory’s law enforcement has witnessed a steady rise in the requests by the BVI for mutual legal assistance. However, specific figures on the increase in BVI requests to foreign authorities were not provided to the assessors. The main legislation are the Criminal Justice (International Cooperation) Act, 1993 (CJIC) and the Financial Services (International Cooperation) Act, 2000 (FSIC). The BVI has a specific Mutual Legal Assistance (United States of America) Act, 1990, with the United States.

32. With respect to the financing of terrorism (FT), the BVI is subject to two statutory instruments enacted by the United Kingdom that are applicable to Overseas Territories including the BVI. These are No. 3366 in 2001, The Terrorism (United Nations Measures) (Overseas Territories) Order, and No. 1822 in 2002, the Anti-Terrorism (Financial and Other Measure) Overseas Territories), which address the major requirements for FT under the 1999 United Nations Convention for the Suppression of Financing of Terrorism and the United Nations Security Council Resolution (UNSCR) 1373.

33. The BVI has taken a pragmatic approach to its legislative framework, designing its major AML/CFT supervisory legislation to apply broadly to banks and trust companies, insurance business, the business of company management, business of mutual fund or providing services as a manager or administrator of a mutual fund, money remittance or transmission, any activity in which money belonging to a client is held or managed by an attorney-at-law or accountant, and the business of acting as a company secretary. The Development Bank of the Virgin Islands is not yet subject to prudential supervision (although it is scheduled to be later in 2003) and is not yet subject to AML/CFT due diligence, record keeping, or internal controls requirements, although they are subject to the suspicious transaction reporting laws. Money remitters, of whom the FSC estimates three known entities, are not subject to licensing of prudential supervision, but a proposed licensing and regulatory act is expected to be enacted in the first half of 2003.

34. A single supervisor, the FSC is responsible for both prudential supervision and ensuring compliance with AML measures. As the FSC was established by the FSCA in January 2002, there have been numerous tasks imposed on its Board and staff to address the statutory and regulatory remits. The managing director of the FSC is an experienced civil servant who was a former chair of the Caribbean Financial Action Task Force (CFATF) and he and other staff of the FSC have been actively involved in AML/CFT efforts in the region for several years. The FSC was created in part to respond to concerns about the independence and effectiveness of supervision arising out of the KPMG Report. The FSC is deliberately building its staff to cover the range of its mandates, including enhancing the staff for AML/CFT compliance, by filling vacancies in the Legal and Enforcement Division; such staff will have a significant role in implementing the legal and supervisory framework under the AMLCP and the Guidance Notes. Full implementation of on site supervision has not been completed and the depth of skill available currently is not yet at the levels necessary to ensure effective and comprehensive supervision for AML/CFT. Nevertheless, the mission notes significant progress in assembling the supervisory tools that are needed, to complete the internal manuals for inspection of the financial sectors, and to exercise the full range of the FSC’s supervisory mandate that affect AML/CFT.

35. The FSC Board and Management exhibit strong commitment to ensuring that the FSC becomes an effective and well resourced regulator. Nevertheless, it is not unrealistic to expect that a period of implementation and structural enhancement is necessary to ensure that the international standards can be fully and effectively incorporated into the FSC’s supervision. The FSC has a realistic understanding of the tasks that lay ahead in improving supervision, in particular the Director, Insurance Business, has agreed that on-site inspections of Insurance managers and their required compliance would provide evidence of alleged deficiencies. It was also agreed that as there were not yet IAIS principles specifically on AML/CFT, guidance notes based on IAIS principles would be suitable at this stage. The Director of Banking and Fiduciary Services has responded to the assessors’ conclusion that both the FSC and the individual financial service sector participants should have procedures in place to test the due diligence that is undertaken outside of the BVI by affirmatively proposing that the FSC amend the AMLCP to require all due diligence to be kept in the BVI in line with the Basle CDD Paper.

36. The Reporting Authority (RA) was established under the Proceeds of Criminal Conduct Act and is the financial intelligence unit responsible for receiving and disseminating suspicious transaction reports (STRs). It is independent of the FSC and consists of three members appointed by the governor and drawn from different disciplines concerned with the financial services industry but is not a regulatory body. The head of the reporting authority is the managing director of the FSC, and its two other members are the head of the Financial Investigations Unit of the Royal Virgin Islands Police Force (Police FINU), which is the investigative arm of the RA, and a Senior Crown Counsel from the AGC. The deputy managing director of the FSC is the Secretary for the RA. The RA has been a member of the Egmont Group since 1999.

37. The investigative authority of the RA is derived from the fact that the head of the Police FINU is also a member of the RA. The FSC, the AGC and the Joint Anti-Money Laundering Coordinating Committee (JAMLACC) are responsible for setting the AML laws, regulations, guidelines and codes of conduct. The JAMLACC is the committee charged with promoting AML guidance, training, and education and it is comprised of a cross-section of public and private sector representatives. The JAMLACC played a key role in the enactment of the AMLCP and prescribed the Guidance Notes, but is not active at present.

38. With respect to FT, the two Statutory Instruments passed by the United Kingdom vest responsibility for FT reporting and detection with the governor, however, the AGC provide support with respect to FT orders. Authorities advise that FT orders to date have not resulted in any identification or freezing of FT related assets.

39. The AGC has responsibility for prosecutions of ML and FT offenses, although prosecutions in the BVI are few and most resources are focused on developing usable evidence for prosecutions abroad. The AGC also has primary responsibility for international cooperation through mutual legal assistance. The mechanisms for mutual legal assistance are generally efficient and the quantity and quality of the mutual legal assistance provided by the BVI authorities is evidenced by the large number of requests received and processed. The authorities are to be commended on their efforts in supporting international investigations and prosecutions. Because of the focus on supporting international criminal investigations, it has not been considered to be a serious need for development of prosecutions in the BVI; nevertheless, the AGC has a dedicated Commercial Crimes Unit that has expertise in ML and financial crimes.

40. The authorities have advised of a proposal to restructure the functions of financial intelligence analysis and investigation of financial crimes by enacting a Financial Investigative Agency (FIA), which will be a separate statutory agency with full police powers. Although the mission did not have access to confidential governmental drafts on the proposed FIA, authorities advised that the FIA will have separate powers to conduct the financial intelligence and investigative functions necessary to process suspicious transaction reports (STRs) as well as to conduct financial investigations originating from mutual legal assistance requests and other international requests. The FIA will be comprised of staff seconded from the Police, Customs, Immigration, AGC, and other relevant agencies. The authorities advise that the FIA should be constituted by the second quarter of 2003.

B. Detailed Assessment

41. The following detailed assessment was conducted using the October 11, 2002 version of Methodology for assessing compliance with the AML/CFT international standard, i.e., criteria issued by the Financial Action Task Force (FATF) 40+8 Recommendations (the Methodology).

Assessing criminal justice measures and international cooperation

Table 5.

Detailed Assessment of Criminal Justice Measures and International Cooperation

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Assessing preventive measures for financial institutions

Table 6.

Detailed Assessment of the Legal and Institutional Framework for Financial Institutions and its Effective Implementation

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Description of the controls and monitoring of cash and cross-border transactions

Table 7.

Description of Controls and Monitoring of Cash and Cross-Border Transactions

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Ratings of compliance with FATF recommendations, summary of effectiveness of AML/CFT efforts, recommended action plan, and authorities’ response to the assessment

Table 8.

Ratings of Compliance with FATF Recommendations Requiring Specific Action

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Table 9.

Summary of Effectiveness of AML/CFT Efforts

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Table 10.

Recommended Action Plan to Improve the Legal and Institutional Framework and to Strengthen the Implementation of AML/CFT Measures in Banking, Insurance, and Securities Sectors

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